Moths in Your Pocket: Managing Unseen Business Expenses

Successful businesses have a strong handle on where they spend their money.

There is no point putting in all of the effort in running a business, finding clients and generating sales if at the end of the day – you have nothing left to show for it. Every dollar you spend must deliver tangible value to you and your business.  If it doesn’t, then it makes no sense to pay it.

This is not just about an unsustainable slashing of costs, but a targeted approach to making sure that your “expenses” are working hard.

Broadly expenses will fall into three groups, “Mandatory”, “Discretionary” and “Owners”.

Mandatory – tax, critical licenses, stock, insurances etc – things that you need to run your business and that you can’t do without. You can however make sure that they are the right fit for your business and that you are paying the right price.

Discretionary – more in the “nice to have” rather than “need to have” category. Challenge yourself on what would happen if you did not have this expense – if the answer is “nothing” or “very little”, then stop this item and the savings go straight to your bottom line.

Owners – premium memberships, trips and toys – items that really provide you as the business owner more benefit (or enjoyment) than they deliver value to the business.

To run a quick health check over your expenses, follow our simple 5 step system;

1 – Grab a copy of your monthly/quarterly expense listing and categorise into the Mandatory, Discretionary and Owners.

2 – Starting with the “Discretionary” items – consider each item and ask;

• what will happen if I don’t have/buy this item?
• is the type/level of the expense correct?
• am I getting the right return for this expense?

3 – Create a list of the items that fail these questions and either stop allowing these expenses or take steps to address the issue (ie. a new supplier, a different product mix or improve the return for the cost).

4 – Move onto the “Mandatory List” and follow the same process, noting of course that there is a consequence to stopping these, so many of the solutions here are around more appropriate pricing or improved efficiency.

5 – Finish with the “Owner” items. Challenge yourself on the true need of these and where possible, their cost should be reduced.

For a typical business, 2 hours of work will highlight $000’s in cost savings. If you are time poor, then consider;

• breaking this review down over a couple of months,
• target items as they come due,
• consider all items over a certain value (remembering that a bunch of small items can add up to something large!) or
• get someone in to help you

One of the most critical elements in any business is not how much money you are making, but more importantly – where you are spending it. 

Lack of good cost control is simply like having moths in your pocket, you open your wallet and your money is gone!